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General Motors (NYSE: GM ) has been pejoratively labeled "Government Motors" since its 2009 bailout, referring to the large ownership stakes that the American and Canadian governments, as well as a labor union, hold in the company. The "Government Motors" label appears to have been quite a drag on the stock price. Despite restructuring efforts that have led to a lower break-even point than at any time in GM's recent history, the company is selling for around five times forward earnings, nearly a third the S&P 500 average. But should investors actually fear that government will harm the business?
Many investors question the government and union owners' dedication to growing the bottom line, or managing the company in the best interests of all shareholders. Skeptics typically point to two possible dangers. Some fear that the government and unions will use their ownership stake to pursue political, rather than purely commercial, goals, like promoting the administration's pro-alternatives stance on fuel, and managing the company for the benefit of unions. Others are concerned that the government will dump its shares as soon as prices rise to acceptable levels. Such a move would push share prices right back down, creating an effective price ceiling for current shareholders.
Don't just idle your engine
The latter objection doesn't make sense to me as a long-term investor. Yes, when the government sells out, prices should drop. But such a sale, motivated by political, rather than economic, factors, would have no negative impact on the intrinsic value of the business. To the contrary, when the Treasury leaves the business, it would eliminate the concern that good politicking would trump good business amongst the board of directors. While prices may fall in the short term, a government-free GM should be even more valuable.
Staying out of GM until the government sells is just a way of trying to time the market, a futile exercise under the best of circumstances. In GM's case, since an eventual government exit is widely expected, this threat may be priced into the shares already -- announcement of a Treasury sale may well result in a short- term price increase, leaving the market-timing crowd out in the cold, having missed their buying opportunity.
Who's in the driver's seat?
I'm certainly wary of the public sector taking a large stake in a private enterprise, and political risk remains. However, three years now into government ownership, the government does not seem to have used shares to push the company into making unwise business decisions. It has been through tax credits, and the purchasing power of the federal fleet, not shareholder demands, that the administration has pushed for smaller, more fuel-efficient, and even hybrid vehicles. All automakers doing business in America are equally susceptible to this influence.
Critics have pointed to the development of the hybrid electric Chevrolet Volt as evidence that the Obama administration is pushing GM to be more environmentally-friendly, and the subsequent low sales of the vehicle as evidence that this influence is hurting the company. However, General Motors was not alone in pushing ahead with alternative vehicles. Besides Toyota's (NYSE: TM ) trailblazing Prius, since the auto bailout, we've seen Ford (NYSE: F ) release the Focus Electric, Nissan (PINK: NSANY) debut the Leaf and, perhaps most strikingly, Tesla Motors (Nasdaq: TSLA ) develop a complete line of fully electric, ultra-luxury vehicles. None of these companies made decisions due to government ownership; instead, it seems that industry consensus is to move towards greater fuel efficiency. While alternative vehicles do not yet contribute significantly to earnings at any of these companies, their rollout should be seen as a bid to invest in a future market.
And what of government pressure on GM to pamper its union employees, political allies of the administration? The company's actions tell a very different story. GM has moved aggressively to reduce its pension obligations by offering buyouts to pensioners, and transferring health-care risk off of its own books and onto the unions. Last year, GM signed a contract that limits labor costs, from a whopping $78 per hour in total compensation pre-bankruptcy, to $56 per hour in 2011. This compares very favorably to Ford's $58 per hour, and Toyota's $55 per hour. That doesn't look like a company being forced to coddle unions.
When the rubber hits the road
None of this is to say that GM faces no risks. The market in Europe is deteriorating rapidly and, while the new GM North America is structured to be profitable even at market bottoms, newer entrants, like Hyundai and Nissan, have even greater cost advantages. However, GM should be seen for what it is: a company in the midst of a successful turnaround, enjoying its tenth consecutive quarter of profitability. While government ownership has been a detriment to the share price, it does not appear to have materially impacted the company's operations or intrinsic value. Patient investors should view the "Government Motors" stigma as a buying opportunity, not a threat.
For some, however, investing alongside the federal government just isn't their style. Luckily, General Motors isn't the only major automaker on sale. Ford is facing an improving sales environment, and has worked to streamline its cost structure right alongside GM. For a complete analysis of the risks and opportunities Ford faces, and a full year of company updates, check out our premium report.